Tax math shows top rate is just a starter

Article by: JACKIE CALMES

New York Times

December 8, 2012 - 8:56 PM

WASHINGTON - Despite hints in recent days that President Obama and House Speaker John Boehner might compromise on the tax rate to be paid by top earners, a host of other tax questions could still derail a deal to avert a fiscal crisis in January.

The math shows why. Even if Republicans were to agree to Obama's core demand -- that the top marginal income rates return to the Clinton-era levels of 36 and 39.6 percent after Dec. 31, rather than stay at the Bush-era rates of 33 and 35 percent -- the additional revenue would be only about a quarter of the $1.6 trillion that Obama wants to collect over 10 years. That would be about half of the $800 billion that Republicans have said they would be willing to raise.

That calculation alone suggests the scope of the other major tax issues to be negotiated beyond tax rates. And that is why many people in both parties remain unsure that a deal will come together before Jan. 1. Without agreement, more than $500 billion in automatic tax increases on all Americans and cuts in domestic and military programs will take hold, which could cause a recession if left in place for months, economists say.

"The question is making sure that we hit a revenue target that's required for a truly balanced deficit-reduction plan," said Rep. Chris Van Hollen of Maryland, the senior Democrat on the House Budget Committee. "And when the president and all of us say this is a question of math, we mean it. It's very hard to make the numbers work without the top rates going back to the full Clinton-era levels."

In recent days, comments from some Republicans, including Boehner, have hinted that the party might be moving toward a concession on tax rates. Seldom mentioned is that Obama's revenue total also reflects four other changes from Bush-era tax cuts: higher tax rates on investment income from capital gains and dividends, and the restoration of two other Clinton-era provisions limiting deductions and tax exemptions for affluent individuals. Together those changes would raise $407.4 billion over a decade -- nearly as much as the president's proposal on higher rates, which would raise $441.6 billion by 2023, for a total of $849 billion. Another $119 billion would come from higher estate taxes, opposed by Republicans and some Democrats.

And both the president and Republicans are committed to raising hundreds of billions of dollars by overhauling the tax code to further limit or end the tax breaks that high-income taxpayers can claim, though they differ in how to do that.

Republicans want to raise all $800 billion from overhauling the tax code, erasing tax breaks for high-income households and using the new revenues both to reduce deficits and to lower everyone's tax rates. But they have not proposed how to do that, and the president insists it cannot be done without hitting middle-income taxpayers.

Obama has proposed to keep existing tax breaks but to limit the rate of those breaks for people in higher tax brackets to 28 percent, which would raise $584 billion in a decade. He has proposed variations of that proposal for four years, only to be ignored by both parties because of opposition from charitable groups, the housing industry, insurers and others to curbing deductions for charitable giving, mortgage insurance and other purposes.

Roughly splitting the difference on the top rates -- settling at 35 and 37 percent -- would collect nearly $200 billion over 10 years, under half the amount that would be raised if the rates reverted to Clinton-era levels, said data from Citizens for Tax Justice and the Institute on Taxation and Economic Policy, research groups that advocate for a progressive tax code.

In the years of debate over the Bush tax cuts, which predates Obama's first election, $800 billion has been the rough estimate for how much revenue could be raised in the first decade by ending them for the highest-income 2 percent of taxpayers. But most attention focused on the top rates, which account for half of the revenue equation.

The remainder would come from the other four tax changes for Americans with the highest income, two raising taxes on investment income from capital gains and dividends and two restoring restrictions on the itemized deductions and exemptions claimed by high earners.

Under Obama's plan, the tax rates for long-term capital gains and dividends, now 15 percent, would revert to 20 percent for capital gains and to 39.6 percent for dividends, the same as for ordinary income. Republicans oppose the increases, and Senate Democrats oppose the proposed tax on dividends.

People in both parties say that the four tax issues can be readily worked out. Obama is widely expected to give ground on the main sticking point, the dividends tax. Yet that would mean roughly $100 billion less in additional revenue over 10 years than his current proposal for the higher dividend tax.